This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.
Another title I thought of this week is Super Small Time.
The other day Andrew Sullivan tweeted that Dr. Fauci was wrong about delaying second vaccine doses. Sullivan is my favorite opinion columnist. I often disagree with him but I like the way he thinks, and writes. He (seems) to come to his opinions honestly. But when I clicked through his critique I found Fauci saying people were taking a big risk delaying their second dose.
Allahpundit @allahpunditremember when fauci told us the uk was taking a big risk by delaying second doses https://t.co/nwpZEV74dn https://t.co/fJmakeFMkt
Andrew thought Fauci was wrong because it turns out that if you delay your second shot of the Pfizer vaccine it’s even more effective. But that doesn’t mean he was wrong. At the time of the statement they didn’t know if the vaccine would be more, or less, effective with a delayed 2nd dose. Fauci was talking about risk.
In the perfect market risk is accurately priced. Risk should mean higher returns, and greater losses. I have strange memories of the 70s and 80s, when people believed in the market (though for at least 4 years of that time I was on heavy drugs). In the Bush years the perfect market was a political cry, but it was already obviously false to anyone who wasn’t a free market fundamentalist. Then Texas held California’s energy hostage. Then Enron. Then Bitcoin. Nobody believes in a perfect market anymore, but it wasn’t that long ago.
Daniel Kahneman and Amos Tversky invented Behavioral Economics, proving that people aren’t rational and markets aren’t rational as a result. A free market fundamentalist will always have a reason why a particular market was not actually a free market, like a modern day communist making excuses for Stalin by saying “Real communism has never been tried.” True free market capitalism has also never been tried. And it never will be. One reason for that is it hurts much more to lose $5 than it feels good to find $5.
Michael Lewis wrote an amazing book about Kahneman and Tversky, The Undoing Project. I forget the lessons of this book all the time. I remember The Big Short, though, which is about being smarter than everyone else.
Howard Marks, the founder of Oaktree Capital Management, wrote a book called The Most Important Thing (recommended to me by a reader of this newsletter). The point of investing, Marks says, is to beat the market. If you can’t beat the market you should just buy some index funds and forget about them. Most people can’t beat the market.
What’s hard to quantify, Marks says, is risk. If you made the same money, but took less risk doing it, that would also be beating the market.
When the market is hot, as it’s been since the beginning of our current plague, people pay less attention to risk. Warren Buffett explained why Berkshire sold their airline stock in 2020. They owned 10% of the airlines (or something like that). And the stocks crashed and, Buffett said, they were over exposed. But the government bailed out the airlines, the airlines recovered and then some. But it wasn’t a given.
When someone beats the odds we question the odds.
People blamed Buffett for being wrong, like Sullivan blames Fauci for being wrong. But he wasn’t necessarily wrong. Sometimes you do the right thing and it doesn’t work out, or you take an extraordinary risk and succeed. If it happens consistently you’re a genius, otherwise you’re barely a statistic.
This is why it’s enjoyable to play Bridge.
One of the short term rental operators I interviewed bought a house in Algiers, on the other side of the Mississippi River. The house was zoned for short term rentals but the neighbors didn’t like it; they didn’t want to live next door to a hotel. She bought the house at full price, because she didn’t want to miss the opportunity, so almost immediately she lost $20,000. It was new construction, with a view of downtown and the Bywater on a clear day. She bought the house in February of last year, just before Covid.
She couldn’t rent the house for enough to cover her expenses without short term rentals. When she described her situation she said she was “ratfucked” and “lacked a plan B” and felt like she’d been “rammed straight with a broken sewer pipe.” And then she got lucky. A long-term renter agreed to an enhanced price that covered her expenses, and the property rose in value, significantly.
“What a gift,” she said, “to learn from a mistake without paying for it.”
“First one’s on the house,” I replied, though I imagined she hadn’t learned from her mistake at all. Not if she’s like me. I only learn things the hard way, and sometimes not even then.
It’s possible, if you find a good REIT, to make a 10% passive return on your income, but it’s not exactly liquid. There are holding periods, penalties for early withdrawal. It’s not usually too difficult to purchase an income property and make 15%, or at least it hasn’t been since 2008. Single family homes were easily returning that much; it took no special skill. If you used leverage to purchase the home you would make even more, with the benefit of paying down the loan at the same time, which most people don’t count as return, but they should.
In the past year homes have gone up in price significantly, which makes it harder to rent at a price that covers your expenses. Home prices are up 17% but rents have only increased 2%. If you purchase a house and it declines in value you could be stuck for a while. Real estate is never liquid to begin with, though it does have the benefit of being an asset you can borrow against. If the rent covers the nut then you’re OK. You hold. You take your profit. Most people are looking for $400 a door. Sometimes less. But if you can’t rent for more than your expenses, and the value declines, you have a problem. It’s a problem of risk, risk that, in a perfect market, would be priced in. But that’s not how things are.
In the forward to a later edition of Kenneth Galbraith’s A Short History Of Financial Euphoria, Galbraith states that we will always have Tulip Crazes. It will happen again and again. The beautiful blue tulips dancing magically, their bright skirts spinning ever faster over their exposed bulbs, buoyed by higher and higher returns. Like a dream…
When the market goes down, profits are slow and scarce, then we price risk higher, though there is actually less risk. The market goes up, your neighbor doubled their money with Tesla stock. You missed the party and never got to wear your new dress. That’s when we price risk lower, though in fact this is exactly the time when we should be more cautious. In other words, we price risk high when we should price it low and price risk low when we should be most afraid because something inside us is sure the good times will last forever. Something primal.
Young people don’t believe as strongly in death, despite having much more to lose.
Everything is different this time, of course. Everything except human nature. Human nature does not change it just experiences new circumstances. Historically speaking there are a few things you can always count on. One is men paying for sex.
The other is mob mentality. Mob mentality is the most human trait and it is nearly impossible to avoid. We have glaring examples like the Nazis and the Rwandan Genocide. But also witch hunts, the McCarthy Lists, and #Metoo. Recovered Memory Syndrome was not long ago (Ethan Watters wrote a book about it). The truth is that all men really are created equal, as the saying goes. What it means is that all people, every identity group, is capable of the same foolishness and atrocities.
We will never stop forming mobs, believing that this time is somehow different. This time we don’t need to presume innocence. This time the market will keep going up. Once we slay Julius the people will embrace us as heroes.
I don’t know where you should put your money, that’s not really what this is about. If you want to be a millionaire you’ll likely need to start a business; passive investing won’t get you there.
But I want to think about investing. In almost every case investing is a percentage of your income. You invest the amount of money you can afford and the investments make a $100K salary into a $115K salary, or $105K if you’re cautious. The investments compound. Eventually, if you’re good at it, you will make more from your investments than your employment. But it will take 6 years (ish), if you’re aggressive and a little lucky. It doesn’t work very well without the employment part, (including self-employment).
There is no such thing as an active investment. An active investment is a business. If you’re managing short term rentals, that’s not investing in real estate, though there are investment benefits. There are ways you can work for yourself if that’s what you want, but you’ll have to figure out what they are based on your own strengths and, perhaps more importantly, weaknesses. There are some people who can take a not enormous sum of money, say $30,000, and make a living actively trading in the stock market. It’s both uncommon and lots of work.
Charles Bukowski said that anyone who could consistently beat the horses was underemployed. The kind of genius who beat the house with its 15% rake, he thought, should be a brain surgeon.
The most Bukowski ever made from the horses consistently was when he started taking other people’s bets, leaving the post office early to get to the track and place everyone’s wagers. Eventually he realized that he didn’t have to place their wagers, he just had to pay the winners. So he stopped placing his co-worker’s bets and enjoyed the house rake for the first time.
There was a kernel of something there. But Bukowski wasn’t the type who could really exploit it and start his own off track betting establishment. He was lucky enough to be a great writer, and to be discovered while still alive. He died rich. But it was very much against the odds.
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